Why Investing in Fossil Fuel Companies is Becoming Increasingly Risky

Under the 2010 Cancun Accord governments from around the world committed to reduce greenhouse gas emissions enough to prevent global temperatures increasing by an average of 2°C.

On Friday the Carbon Tracker Initiative and the Grantham Research Institute released research which showed that global financial markets are still basing all valuations on the assumption that emissions will just continue to rise into the future.

Last year companies invested $674 billion in searching for, and developing, assets that will become off-limits and therefore left in the ground if the governments stick to their emission reducing plans; at which points these companies will quickly find their fortunes turn and become unpopular amongst investors.

Professor Lord Stern of Brentford, chair of the Grantham Research Institute, has already stated that “smart investors can already see... that investing in companies that rely solely or heavily on constantly replenishing reserves of fossil fuels is becoming a very risky decision.”

The 200 companies that were studied as part of the research own an estimated 762 billion tonnes of CO2 trapped in the various fossil fuels reserves that they possess. This poses a little bit of a problem as in order to have an 80% chance of keeping global average temperature rises to less than 2°C a carbon budget must be set which will only allow between 125 billion and 273 billion tonnes of CO2 to be released into the atmosphere. Of the current reserves owned by energy companies, roughly three quarters will have to be left in the ground.